'Shock Treatment': Argentina Devalues Peso by 50%

Facts

• Javier Milei’s newly sworn-in administration devalued Argentina’s peso by more than 50% against the US dollar on Wednesday as part of the libertarian’s comprehensive plan to reverse the country’s debilitating economic crisis.¹
• Economy Minister Luis Caputo on Tuesday announced the plan to devalue Argentina’s currency from 400 pesos to the US dollar to 800, while Milei warned of the looming shock treatment to deal with his country’s economic 'emergency' in his inaugural speech earlier this week. He said, 'For a few months, we're going to be worse than before.'²
• In his televised announcement, Caputo also acknowledged that the country will still grapple with hyperinflation in the coming months, with prices expected to rise more than 200% this calendar year. Despite the stark rise in official inflation, the country’s black market, which more accurately reflects the peso’s value, has a market rate of 1,045 pesos to the dollar.³
• The administration will also implement a series of austerity measures, including vast subsidy cuts, the cancellation of tenders for public works projects, and plans to eliminate nine government ministries. However, the libertarian government will double social spending for the nation's poorest.⁴
• Caputo didn't specify by how much the state would reduce its generous subsidy of fuel and transport, but he announced cutting the number of government ministries in half and halting both discretionary transfers and all ongoing public works that don’t have external financing. He also announced the suspension of state advertising to cut 34B pesos.⁵
• Argentina has experienced 143% inflation over the last 12 months, with 40% of the population living below the poverty line. The country also has a trade deficit of $43B and owes $45B to the International Monetary Fund (IMF), with $10.6B due to multilateral and private creditors by April. The IMF welcomed the new government's proposed measures.²

Sources: ¹Reuters, ²Associated Press, ³Archive, ⁴Al Jazeera and ⁵Buenos Aires Times.

Narratives

• Right narrative, as provided by Armstrong Economics. Javier Milei is staying true to his campaign promises and doing what’s best for Argentina, even if it stings in the short term. He understands that triple-digit inflation and a 40% poverty rate cannot come down overnight and that the only viable solution is to drastically reduce the size of government. While many politicians around the world print more money to temporarily stave off growing doom, Milei is taking a principled stand that will benefit future generations of Argentinians.
• Left narrative, as provided by Buenos Aires Herald. The man who can't understand the data on COVID deaths shouldn't be in charge of national economic policy. Milei is taking a radical and dangerous approach that could further damage Argentina’s fragile economy and democracy. The far-right leader calls himself a libertarian but is acting far more like a fascist with his austerity measures as he exploits the anxiety of Argentinians to portray a doomsday scenario that can only be fixed by him.

Predictions